Ontario to link with California and Québec cap-and-trade programs

On 22 September 2017, Governor Brown of California, Ontario Premier Wynne and Québec Premier Couillardsigned a linking agreement extending the existing link of the California and Québec cap-and-trade programs to also include the Ontario program. The three programs, all belonging to the Western Climate Initiative (WCI), were designed based on a common template, which lay the foundation for their linking. The agreement will come into effect on 1 January 2018. As part of a linked program, allowances from any of the jurisdictions can be used interchangeably for compliance. Allowances will also be auctioned jointly. All three stressed the link was a key step in strengthening the importance of international cooperation and sub-national action in the fight against climate change.

Québec and California have been operating their cap-and-trade programs since 2012 and 2013 respectively, formally linking their systems as of 1 January 2014. Ontario, which had launched its own cap-and-trade system this year, had been planning to link with the other WCI jurisdictions since the program was first proposed. It was found that a linked carbon market would be to be the most cost-effective option to reduce emissions for Ontario.

With a 2018 cap of 136 million tCO2e, the inclusion of Ontario will significantly increase the size of the WCI carbon market. Ontario’s market is more than twice as large as Québec and about 40% the size of the California market. Together, the Canadian provinces will constitute about one-third of the linked market. Collectively, the Californian, Québec and Ontario linked market, will form the largest carbon market after the European Union Emissions Trading System (EU ETS) (and soon, China).

The link is expected to significantly reduce compliance costs for regulated entities in Ontario, as they can use the additional abatement opportunities in the other WCI jurisdictions, particularly in California, as of 2018. Gross Domestic Product (GDP) is estimated to be impacted at least eight times less than an isolated Ontario market, for the given reduction target.

All of the three jurisdictions pursue ambitious climate policies and will each decrease their overall emissions by more than 35% compared to 1990 by 2030. After finalizing regulation to allow the linkage, the three jurisdictions will hold their first joint auction in early 2018.